Insight & Outlook:
An Analysis of the current economic climate and the implications for the Ski Resort Industry, especially as it pertains to Winter Park
Living and working in a resort town, it’s easy to develop a false sense of security and become somewhat isolated and insulated from what’s going on in the “real world”. After all, we live in a place where people spend hundreds and thousands of dollars to come on their vacation – a place we consider as our own backyard, where we can play mostly at our discretion, rather than at set times of the year.
However, in the last 6-9 months, we have seen a series of crises that have threatened the stability of the US economy, and likewise reeked havoc with consumer confidence. Add to that serious issues in industries inextricably linked with the business of travel and mountain vacations, and we face the stark reality of a significant downturn in future visitations and overall consumer spending in our valley.
As we gear up for the summer as well as look ahead to next ski season and beyond, I think it’s important to firstly understand what is happening and why, which might then enable an intelligent prediction to be formed of how things will be further down the line.
Housing Downturn and Credit Crunch
America’s economy has been hit hard by the double blows of the worst housing downturn since the Great Depression, and an unprecedented credit crunch. Following the financial markets crisis which erupted in August 2007, the US housing bubble truly burst, resulting in high default rates on “sub-prime” mortgages made to higher risk borrowers with lower income or lesser credit history than “prime” borrowers.
Defaults and foreclosure activity increased dramatically with many people merely walking away from negative equity scenarios. According to a study by Realty Trac released on April 29th, more than 156,000 families have lost their homes due to repossessions, and 650,000 foreclosure filings were issued in the first quarter of 2008 – up 112% over last year. As a knee-jerk reaction, lenders have reduced lending activity, tightened lending standards, or made loans at higher rates – a.k.a. the “credit crunch”. This in turn has decreased investment by businesses and consumer spending placing downward pressure on the economy.
New home sales are at their lowest in 16½ years, and with a surplus inventory of homes, there has been a decline in new home construction. Builders have slashed spending by 26.7% in the first 3 months of 2008 – on an annualized basis, the most in 27 years. This has placed yet further downward pressure on growth.
Are we in Recession?
There’s a lot of talk about the US economy being in recession right now. The problem here is that you never know you’re in one until after the event. The true definition of a recession is a decline in a country’s real Gross Domestic Product (the measurement of the value of all goods and services produced within the USA), or negative real economic growth, for two or more successive quarters of the year.
The International Monetary Fund, in a forecast released on April 9th, somewhat contradicted itself by predicting a “mild recession” in 2008, while at the same time estimating growth at 0.5% this year and growth at only 0.6% in 2009. This comes after a 2007 4th quarter growth rate of 0.6%. So how are we doing so far?
Last Wednesday, the Commerce department reported that the economy had grown at 0.6% for the first quarter of 2008. The only reason this figure wasn’t in negative territory, was due to a rise in inventories and support from exports as the weakness of the dollar made US products cheaper for foreign buyers.
On the investments side, 24 of the largest 25 US Mutual Fund managers saw their long-term assets fall in the first quarter of 2008, the worst start to a year for a decade, as returns slumped and investors pulled out of funds. Why is this important? Falling investment is usually associated with subdued household spending levels.
On the jobs front, last Friday May 2nd, the Labor Department reported that for the fourth month in a row, the economy lost jobs, with losses in April totaling 20,000. While this particular month was better than most economists were predicting, unemployment stands at 5%, or 7.6 million, up from 6.8 million a year ago.
So, while we may not technically be in recession right now, there is no doubt the economy has ground to a screeching halt, and may remain subdued well into 2009.
Inflation
It’s very rare to talk about economic stagnation and inflation in the same breath. Inflation is usually fuelled by aggressive consumer spending, and/or wage demands over and above company growth rates. The Federal Reserve usually looks to control inflationary tendencies by increasing interest rates. However, while the Federal Reserve has cut interest rates by a total of 3.25% since September 2007 to combat the economic downturn, there are concerns about inflation starting to spike upwards. I think these concerns are somewhat misplaced, as there are external influences at work with the two main contributors to this trend – food and oil.
Food
Why is the cost of food going up? As with most things “economic”, it’s down to the forces of supply and demand. On the demand side, strong economic growth in China and India and other emerging countries have raised demand for food, especially meat and related animal feeds. In addition, an increasing demand generally for biofuels, especially corn- and soy-based ethanol, has resulted in a major diversion of edible crops away from the food system. This in turn has precipitated a diversion of acreage away from producing food and into biofuel crops production. With grains used for livestock and poultry feed becoming more expensive, this has pushed up the cost of beef, milk, eggs, cheese and other basic necessities.
On the supply side, the primary growing regions in the US, Europe and Australia have all endured several detrimental weather events impacting output, especially droughts in 2006 and 2007 which stagnated production of maize, rice and soybeans. Wheat prices are going up because US farmers are either growing less of it, or moving it to less fertile ground. There are also moves by India, Vietnam, Cambodia, China and now Japan to restrict rice and other grain exports.
Add to this record oil prices which have driven up transportation costs as well as processing costs, since modern farming is so energy-intensive. The weakness of the dollar has prompted a significant increase in exports which in turn has diminished stockpiles. Investors exiting Wall Street’s mortgage-related strife have pumped money into grain futures driving up prices even more.
The sum total of all these converging forces is that food inflation is at its highest level in 17 years and we’ll have to resign ourselves to the new reality of more expensive food. If this comes as an additional hardship to families in the US, pity the under-developed countries where the poorest quartile of consumers spends close to 75% of their income on food.
Oil
Contrary to the supply and demand analysis above for food, oil is a different story, although it is still the marketplace that has been pushing the price ever higher. Unlike some gas-price spikes in the past linked to limited inventories, refineries say there is a surplus of gasoline. The President of OPEC (Organization of the Petroleum Exporting Countries) has blamed record oil prices on the weak dollar and global political uncertainty.
Certainly the sharp increase in crude is partly speculative, driven by investors buying into oil futures as a hedge against the falling dollar and a rise in inflation. But there have been disruptions to supply which have created bottlenecks. The war in Iraq, rebel activity in Nigeria, and even labor action in Scotland, have all been factors in oil price increases of late. However, with more crude being produced offshore which in itself is more expensive, as well as the act of refining the oil becoming costlier, there are additional forces at work.
Moreover, the rapid economic growth from developing countries such as India and China has created an insatiable appetite for fuel. With a staggering combined population of 2.45 billion, plus annual growth of 7-9%, there is no sign of flagging demand. Likewise booming economies in the Middle East countries as well as continued demand in industrialized countries have conspired to push the price per gallon higher, and in this country towards $4.00/gallon. Last month, the cost of crude per barrel edged $120.00. Opec’s President has warned that it could hit $200.00 a barrel. With a serious lack of investment in upstream supply infrastructure, Opec is unlikely to meet global demand in the long-term.
Perhaps only when the U.S. currency strengthens might we see a fall in gas prices. Each time the dollar gains 1%, the price of a barrel falls by $4.00.
Consumer Confidence
With all this bad news, it is no wonder that consumer confidence has taken a battering, and eroding consumer confidence foreshadows weaker spending.
The April 29, 2008 Consumer Confidence Index, as compiled by the Conference Board and derived from the responses of a representative sample of 5,000 U.S households, revealed that consumer confidence had slipped to its lowest level in 5 years. The index, at 62.3, is at its weakest point since it registered 61.4 in March 2003, ahead of the Iraq invasion, and compares to a peak of 111.9 seen in July 2007.
A similar gauge of consumer expectations – the Consumer Sentiment Index – paints an even grimmer picture. Compiled by Reuters/University of Michigan Surveys of Consumers, its index was 62.6 in April, (compared to a peak of 96.9 in January 2007), and represents the lowest point in 26 years!
Economic Stimulus Act
On February 13, 2008, President Bush signed H.R. 5140, the Economic Stimulus Act of 2008 designed to stimulate consumer spending. The plan provides rebates to 128 million American households and amounts to $152 billion, or about 1% of GDP. However, all evidence suggests this grand plan will have only a marginal effect on the economy, and nowhere near what President Bush hopes. I suspect history will not be kind with his words “The bill I’m signing today is large enough to have an impact”.
A CNN/Opinion Research poll last month revealed that only 21% of Americans were likely to spend their check (or direct deposit), with 41% planning to use it to pay bills and 32% expecting to put the money into a savings account. I don’t know what the other 6% are planning to do with it – head for Las Vegas and gamble it away, or stick it under a mattress?
Debt, of course, represents money already spent, whereas this Act was designed to encourage additional spending. Consumers in favor of adding to their reserve funds want to increase their financial liquidity to protect themselves against worsening future conditions. Then there’s the psychological aspect of “framing” the payment as a “rebate”, instead of a “bonus” or “windfall”. A rebate is a return of money paid and makes people more likely to save the money than spend it. A bonus is an “extra”, over and above regular remuneration.
I guess the President didn’t refer to the follow-up studies after the 2001 rebate, that showed only 28% of taxpayers surveyed nationally said they spent their rebate.
Airline Industry
Getting away from broader macroeconomic factors and honing in on aspects related to travel, the current state of the airline industry warrants close attention.
So let’s say that in spite of the above gloomy prognosis for the economy and the negative impact on your wallet, you still intend to go on that ski vacation. For destination skiers, flying is the preferred mode of transportation, a prospect that seems less appealing than ever in the face of the current turmoil in the airline industry right now.
Adapting to the increased security checks and rules and regulations, is now a thing of the past, an accepted hassle for the sake of a safer passage from A to B. However, soaring jet-fuel prices have of course led to fare increases, and according to the current Delta Airlines Chief, ticket prices should go up 15-20% just to enable airlines to break even. One airline analyst said last week that if current fuel prices persist, the effect on industry profitability is expected to rival – if not exceed – that of the 9/11 terrorist attacks.
The airline industry has consistently attempted to reconcile the conflict of trying to remain competitive to keep or gain market share, with the ever increasing cost of fuel that drives up their operating costs. Over time, if the balance is not maintained, the result is bankruptcy (as has been the case with a number of low-cost carriers recently), Chapter 11 filings, forced mergers or acquisitions, etc.
For airlines continuing to operate, jobs have been slashed, flights have been cut-back or cancelled altogether, surcharges are being levied on that “2nd piece” of checked luggage, in-flight meals are being phased out, and even charges are being introduced (by US Airways) for aisle or window seats at the front of their aircraft.
Airline travel has become markedly more stressful, and the situation is not likely to improve. Due to fewer carriers, flights will become jammed to capacity, with crammed overhead bins and fewer on-time departures and arrivals. According to a recent USA TODAY computer review of millions of Department of Transportation records, air travel is slower today than at any time in the past two decades. Congestion on the ground and in the sky is adding more than an hour to some routes as planes take longer to taxi and fly to their destinations.
It’s not surprising that the airline industry has hit its lowest rating in the nearly two decades. The Annual Airline Quality Rating survey found that more bags were lost, more passengers were bumped, more consumers complained and fewer flights arrived on-time than in the previous year. The rate of consumer complaints was up 60% over last year.
To make matters worse, in March, Southwest Airlines were hit with a $10.2 million civil penalty for missing safety inspections and then continuing to fly planes with passengers on board even after realizing the mistake. And last month, American Airlines were forced to cancel over 3,000 flights in one week due to safety inspection breaches, causing major disruption to over 250,000 passengers.
Competitive Landscape
The cruise industry has often been singled out as the most significant competitive threat to the ski resort industry. One might have thought that with record oil prices and the US economy’s bleak outlook, cruises might have taken a hit also. Not so, according to cruise executives gathered at the Annual Seatrade Shipping Convention in Miami in March. The cruise industry has demonstrated a track record for standing strong in harsh economic times, and cruise company chiefs cite the cruise product itself for providing tremendous value at a low price as the main reason for optimism.
Americans still like to vacation, but they will be looking for more bang for their buck. Average cruises are about 20-50% cheaper than comparable land-based vacations, of which skiing forms a part. With more and better amenities on-board, plus a new exciting array of destinations, (Asia for example), the industry in general and the travel agents who patronize it through their client bookings in particular, remain very bullish about what is going on.
Closer to home, a comparative analysis of statistics compiled by the Mountain Travel Research Program and drawn from lodging entities of 13 ski resorts (10 in Colorado, 2 in Utah, plus Whistler), reveal that Winter Park is at the “wrong end” of the scale for occupancy rates, residing in 8th place for November and December, 10th for January, and next-to-last for February and March. While not the only reason, the Resort has admitted that they “got it wrong” when it came to certain lift ticket pricing for last season, and this has been confirmed to me by many of the key wholesalers with whom we work, who also cite multiple changes to their lift ticket rates as a constant source of frustration.
With the Winter Park Base Area development ongoing, there has been a flood of new units at Frasers Crossing and Founders Pointe joining the rental pool which have inevitably taken away – and will continue to do so – market share in downtown Winter Park and further on throughout Fraser and the rest of the valley. This presents a very real challenge for the traditional and loyal Winter Park lodging entities that have long maintained a delicate – if not for some “uneasy” – balance between competition and cooperation: competition with Intrawest’s management program for occupied units, and cooperation with Intrawest in its overall Resort “guise”, in various marketing initiatives and programs.
Wanting to be “at the base” is no different to wanting front-row seats at any major sporting event. There’s a price to pay of course, but sometimes the price differential to comparable or even more modest units, downtown is worth it to many. Indeed many “marginal” wholesalers with whom we work, said that most – if not all – their business was at the base last season. Furthermore, a UK Wholesaler who has “come back” to Winter Park for 2008-09, indicated to me that the only properties they would be marketing would be those at the base.
Conclusion
On the broader economic front, there is doubt that we have and are currently witnessing a series of inter-related crises that have rocked the stability of the domestic and global economy, and the level of confidence of the everyday consumer. Households have been dealt multiple blows from which it will take a long time to recover, and who in the meantime will curtail expenditure of discretionary income in favor of making savings or channeling a higher percentage of earned income toward basic essentials.
The main point to remember about the economic malaise we find ourselves in is that it won’t last. We’re just in the middle of a massive macroeconomic adjustment that will perhaps take longer to play out than one might hope. Lower interest rates, direct government intervention in the financial markets, as well as the ongoing strong world demand for US goods, should ensure that the US economy finally comes out of the doldrums, but maybe only as late as the latter half of 2009.
In the interim however, the prognosis for our summer season for adding new bookings and especially the 2008-09 ski season is not positive. According to The Conference Board’s April report, the percentage of respondents intending to take a vacation over the next six months has fallen to a 30-year low. It is important therefore that we significantly pare our expectations for future occupancy levels, rental income, expenditure in our bars, shops & restaurants, and consequently sales tax dollars for our towns.
